Ethanol, Energy , and Economics

The search for an alternative to foreign oil has some looking back to a 200 year old fuel.

Wilmington NC – [Click the LISTEN button to hear Dennis' commentary.]

Insights were revealed into federal energy policy as the omnibus energy bill recently worked its way through Congress. One key feature is, substantial new federal support for fuel ethanol. The aim is to double ethanol production within eight years.

Ethanol is grain alcohol. In the US it is produced from corn. Other countries, notably Brazil, produce it primarily from sugar cane. It has been used as a fuel, as well as a beverage, for nearly two centuries, and was one of the first fuels used for automobiles early in the 20th century. Due in part to a $2 per gallon ethanol tax levied in the late 1800s, and Prohibition in the 1920s, gasoline became the leading motor fuel.

Now, ethanol is being promoted as a solution to US dependence on foreign oil. Monte Shaw of the Renewable Fuels Association put it this way: ?Every gallon of ethanol we use displaces foreign oil. Its not going to get the job done by itself, but it?s a step in the right direction.?

Federal subsidies to refiners for using ethanol in motor fuels are the primary incentive in the new energy policy. But, ethanol also benefits from a federal buy-out of MTBE producers. MTBE is a petroleum-based fuel additive used to reformulate gasoline to meet clean-air standards established for major metropolitan areas with serious pollution problems. Ethanol is a substitute for MTBE, which the EPA recommended be phased out when it began showing up in drinking water.

Auto makers have also backed federal policies supporting the ethanol industry since introducing vehicles that can run on various mixtures of gasoline and ethanol. Federal regulations allow manufacturers to count these vehicles toward fuel-efficiency standards.

But the biggest backers of fuel ethanol are corn growers and firms that manufacture ethanol from corn. In areas where ethanol plants have been built, the additional demand has typically added 10 to 15 cents per bushel to the price of corn. Thus, some argue that ethanol is really more an matter of farm policy than energy policy. Indeed, during the recent congressional debate on energy policy, Senator Charles Schumer remarked that, if the ethanol producers and corn growers weren?t benefitting, we wouldn?t do it.

Critics argue that fuel ethanol wastes both money and energy. Its recent history traces from the energy crisis of the 1970s, when the farm lobby convinced Congress to boost ethanol production with the Energy Tax Act of 1978. This established ethanol tax credits and subsidies that eventually rose to 60 cents a gallon. Even so, falling oil prices in the 1980s rendered ethanol uncompetitive, and by 1985 only 74 of the country?s 163 ethanol plants were still operating.

Consensus on the comparative cost of producing ethanol and gasoline is evasive. Most studies conclude that, when inputs are based on market prices, the cost of ethanol is 50 to 75 percent higher than that of gasoline. Proponents, however, argue these comparisons are specious because they don?t include things such as the military costs of protecting oil supplies in the mideast.

Critics also argue that, all things considered ? such as fertilizer and tractor fuel used to grow corn ? producing ethanol uses more energy than it supplies. But, so does gasoline. The crucial dimension is, both supply fuels in a more useable form than their ingredients, corn and crude oil.

Regardless of the debate over cost and energy efficiency, the reality is that we cannot produce enough corn to supply the nation?s thirst for motor fuel ? even if farmers plant fence row to fence row, and we use none for food. Thus, it is probably most realistic to view ethanol as a bridge fuel, helping shore up domestic supply as alternatives such as hybrid cars and fuel cells become feasible.